Fitch Rates Brinker's Gtd. Sr. Notes 'BBB-/RR2'; Outlook Stable
The upgrade to the credit facility follows the Sept. 13, 2016 amendment which added a guarantee from its Brinker Texas and Brinker Florida operating subsidiaries. Brinker also increased the size of the revolver to $1 billion versus $750 million, extended the maturity date on $890 million of the total to Sept. 12, 2021, and raised the maximum adjusted leverage covenant, which is based on 6x rent, to 4.25x from 3.5x. The remaining $110 million (the non-extended maturity) portion of the credit facility will mature on March 12, 2020. Brinker also The new unsecured notes are guaranteed by the same subsidiaries as the amended and extended credit facility.
Net proceeds from the issuance will be used to repurchase up to $300 million of the common stock and repay up to $50 million of outstanding indebtedness under the company's revolving credit facility.
The assignment of the RRs reflects Fitch's 'Recovery Ratings and Notching Criteria for Non-Financial Corporates issuers' criteria dated April 5, 2016, which allows for the assignment of Recovery Ratings (RRs) for issuers with IDRs in the 'BB' category. The 'RR2' Recovery Rating on Brinker's guaranteed unsecured debt and credit facility reflects the seniority of the debt given the guarantees put in place. The 'RR4' on Brinker's non-guaranteed unsecured debt reflects Fitch's view that recovery on this debt would be average.
KEY RATING DRIVERS
Brinker's ratings continue to reflect Chili's Bar & Grill's (Chili's) top 3 market position in U. S. casual dining and healthy operating cash flow. Brinker has had a strong track record of positive comp growth, improved profitability, and strong free cash flow (FCF) through fiscal 2015.
Chili's represented 97% of Brinker's 1,660 restaurants at June 29, 2016; therefore, the strength of the brand is an important indicator of Brinker's credit profile. Brinker strives to keep the brand competitive and relevant in order to maintain share. However, system-wide comps have been negative for four straight quarters, declining 2.2% in the latest quarter and 1.9% for the fiscal year ended June 29, 2016. Fitch views an outsized exposure to oil-producing states, which are experiencing economic weakness, and the transition from direct marketing to the My Chili's Rewards loyalty program as key contributors.
Fitch believes Brinker has effectively isolated challenges at Chili's. In order to reignite comp growth, Brinker is revamping its loyalty program, increasing marketing spend, enhancing value offerings, and adding more culinary innovation. While gradual improvement is anticipated, comps could remain negative in fiscal 2017 given continued economic weakness in oil-producing states, the highly competitive restaurant environment, and recent declines in restaurant traffic.
Pro forma total adjusted debt/EBITDAR is 3.8x compared to 3.3x for the fiscal year ended June 29, 2016. Fitch projects total adjusted debt/EBITDAR will approximate 4.0x in fiscal 2017 and fiscal 2018.
Fitch's key assumptions within the rating case for Brinker include:
--Comps decline 1% in fiscal 2017, before returning to positive low single digits;
--Operating margin declines to below 10% in fiscal 2017 and 2018, from 10.7% in fiscal 2016;
--FCF approximates $150 million in fiscal 2017, versus $208 million in fiscal 2016, reflecting EBITDA declining from $506 million to around $460 million;
--Total adjusted debt-to-operating EBITDAR rising to around 4x in fiscal 2017.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Consistently positive comps at Chili's with traffic trends at least in line with the industry;
--A commitment to maintain total adjusted debt/EBITDAR in the 3.0x - 3.5x range. This is not anticipated in the near term given the change in financial policy.
Future developments that may, individually or collectively, lead to a negative rating action include:
--A lack of improvement in comps and higher than expected margin contraction;
--Capital allocation policies that remain biased towards shareholders, despite weak operating performance and increased leverage;
--Total adjusted debt/EBITDAR sustained above 4.0x.
At June 29, 2016, Brinker had $31 million of cash and $220 million of revolver availability. Brinker's nearest upcoming maturity is the $250 million 2.6% notes due 2018, which Fitch anticipates will be refinanced.
Fitch projects Brinker will generate roughly $150 million in fiscal 2017, versus $208 million in fiscal 2016. Capex is expected to approximate $110 million - $120 million in fiscal 2017, versus $113 million in fiscal 2016. Dividends are projected to track Brinker's 40% of earnings payout target. Most of the company's FCF is expected to be used for share repurchases.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
--Long-term IDR affirmed at 'BB+';
--Amended and extended guaranteed senior unsecured bank credit upgraded to 'BBB-/RR2' from 'BB+/RR4';
--Guaranteed senior unsecured notes assigned 'BBB-/RR2' ratings;
--Unguaranteed senior unsecured notes affirmed at 'BB+/RR4'.
The Rating Outlook is Stable.